Crowd Betting – The Wisdom and Psychology Behind It

April 4, 2018

Predicting is something that every person in the world does every day. Every decision one takes is a prediction that this chosen path will be more beneficial than any of the alternatives. There is no fact behind that choice. People choose based on supporting evidence and feeling, albeit feeling supported by fact.

Now, if a group of people all predict an outcome, will it be accurate and why?

The Foundation

Crowd betting is based on James Surowiecki’s theory that a large group of people’s opinions will be more accurate than that of a small group, or even that of an expert, when it comes to predicting certain future outcomes.

What has been found during formal and informal experiments is that the more people that participate in a poll, the more accurate the prediction. With predictions furthest from the correct answer being the ones that are predicted early on. As more predictions are added, so it becomes more accurate.

Prediction Polls vs. Betting

What has also been found, is that prediction polls are much more accurate than betting, by as much as 20%, provided that the predicting pool is large and diverse.

Instead of betting on a winner, using a model where people can express their bet as a probability. For example, a horse two has a 20% chance of winning, instead of horse two will come in 8th, once hundreds of people have made their predictions, big data crunching gets to work in order to provide a summary of the crowd’s prediction or bet.

Diversity and large numbers aside, some people are simply better at predicting outcomes than others are and this makes them good at things like forecasting the weather, choosing what to wager on at a casino, or even what the markets may do. Once better forecasters are identified, one can use their predictions to identify other more skilled individuals by matching them. In this way it can be determined which predictions will be most accurate.

Skilled forecasters are willing to change their opinion as they gain knowledge, and therefor improve over time.

However, the system is not foolproof and there must be certain conditions in place to ensure accuracy:

Diversity

Like any undertaking, it is considered wise to spread risk, and gain knowledge from multiple diverse sources.

Crowd betting is no different. Information must be collected from different people using different models to predict their outcome. The information used to create the odds needs to be independent to be relevant.

Individually many of the predictions are wrong, but when the polls are analysed then the diverse nature of the information forms an incredibly accurate picture of the outcome, and that is what the odds are based on.

Leaders and Followers

Many people are naturally inclined to follow, and not all leaders should lead. In betting this creates a bias, where people would rather follow someone else’s prediction that seems reasonable, than to come up with their own. This leads to a skewed reflection of the crowd’s wisdom as many predictions are being based on only one theory, and that theory based on only one person’s prediction process. For the model to work, each individual needs to come to his or her decision independently.

Data is also biased when punters choose to predict based on favourites, even when there is no supporting data.

Decentralisation

This ensures that participators can act independently of each other, eliminating the leader-follower scenario and stopping one person from influencing another.

The issue with decentralisation is that, if there is no platform that can collect all the predictions and combine it, then information is lost, it is not added to the pool, and can therefore not be considered when the market is being set.

The advantage that decentralisation creates is higher accuracy, but the disadvantage is the possibility of information being lost.

Aggregation

Aggregation brings together and consolidates all of the information so that it can be used to predict betting odds.

There are a few large prediction exchanges that aggregate the information. The purpose of these markets is purely to trade in the outcome of specific events. The prices directly correlates with the crowd’s probability ratings on the outcome of an event.

These conditions all provide the perfect storm for crowd betting and determine accuracy, and as they are refined, punters will find that it becomes easier to work out which way to wager.

It’s safe to say that crowd betting and prediction markets have brought a whole new angle to betting, and in time, this type of wagering may well become as popular as betting on sports is.